Selecting ATM Bankers4 minute read

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At-the-market offerings (ATMs) are unique financing mechanisms, because stock is sold intraday – without a fixed price – into the natural flow of trading.  Unlike other financing mechanisms, ATMs provide issuers with a high degree of control over the timing, size, and price of each ATM sale. 

But these distinctive attributes also mean that selecting ATM bankers requires some further, differentiated diligence. 

  1. The marketing vs. reality. It’s become increasingly fashionable of late for many investment banks and smaller broker-dealers to advertise the ability to transact ATMs.  But like many things in life, there is a big difference between simply offering a product or service, and excelling at it.  In order to expertly sell stock into the flow of trading for small-cap stocks that have mercurial trading patterns, experienced traders have to ply all of their expertise to understand where a stock trades, and by whom. [1]  Consequently, when comparison shopping for an ATM banker, you should inquire how many full-time traders a broker-dealer has.  Most of the broker-dealers today that advertise ATM capability have a handful (or less) of full-time traders, such that your ATM trades are predominantly going to be unattended (i.e., they will be advertised in “dark pools” where buyers for your company’s stock might, or might not, show up on a given day).  This is not how you want your company’s ATM to be effectuated, as it will net less capital, and on worse terms [2].
  2. Communication. ATMs entail a high degree of interaction between issuer and banker, sometimes for extended periods of time. Before agreeing to retain an ATM banker, CEOs and CFOs should speak with a bank’s previous ATM clients to make sure that the process and the communication were seamless.
  3. Trading conflicts. Unique conflicts of interest can arise in ATM settings which are easy to overlook. For example, if an ATM bank makes a market in your stock, or otherwise trades your stock, that trading can create an incentive for the bank to elevate the profitable execution of those trades over your ATM sales.  If an ATM bank you’re considering trades your company’s stock, you need to ask how they handle such potential conflicts…and then listen carefully to the answer.
  4. Unavailability. There are certain situations where banks foreclose the availability to access ATMs since it involves selling stock directly into daily order flow; e.g., material news pending, insider trading windows, audit comfort letters, etc.  With that said, some ATM bankers are more restrictive than others in this regard, and some less clear than others about the same.  Accordingly, you need to make sure that the restrictions are clear, and that prior clients confirm that the restrictions were reliably and predictably enforced.
  5. Investor confidence. As discussed earlier, all ATM execution is definitely not created equal.  Over time, fund managers become attuned to ATM banks that provide better execution than others.  Accordingly, it’s worth asking each ATM banker under consideration to provide the dates upon which their last dozen or so ATM facilities were announced, and then examine how those stocks traded for five to 10 days subsequent to the public announcements.  When investors don’t have faith in a given ATM banker’s execution, the stock price after announcement will show it.

Last but not least, it’s important to be mindful that ATMs are not a magic elixir, and they are most definitely not for all small-cap companies no matter what any banker tells you.  They make sense for liquid issuers that can afford to opportunistically access the capital markets to incrementally strengthen their balance sheets.

[1] Irrespective of where a U.S. stock is listed (e.g., NYSE or Nasdaq), shares in a given issuer might trade on any/all of a dozen or more different U.S. exchanges, and there are also more than three dozen private, broker-operated trading venues where U.S. equities might trade.

[2] Consider asking a prospective ATM banker what percentage of their daily trades for other ATM clients are executed at prices above the daily Volume Weighted Average Price (VWAP).  Highly experienced ATM bankers often execute well more than 75 percent of their trades at a premium to the daily VWAP.  Thought it perhaps goes without saying, if the prospective banker can’t answer that question quickly/clearly, you should interview other bankers.